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Emily_Dorotheou_phFactual Background

In December 2004, FHR European Ventures LLP purchased a Monte Carlo hotel company for €211.5 million. Cedar Capital Partners LLC was FHR’s agent during the negotiation process. Unknown to FHR, Cedar had also entered into a brokerage agreement with the seller. FHR then issued proceedings against Cedar to recover the €10 million which Cedar had received under the broker agreement. The High Court found that Cedar had failed to give FHR proper disclosure in relation to the brokerage agreement and ordered that Cedar pay €10 million to FHR. The High Court however refused to grant a proprietary remedy to FHR in respect of the money, instead finding that a constructive trust was created for the benefit of FHR when Cedar received the €10 million. Cedar appealed to the Supreme Court on this issue, challenging whether a constructive trust was created and so whether a proprietary remedy was owed.

The Supreme Court recognised that where an agent acquires a benefit which came to his notice because of his fiduciary position or because of an opportunity resulting from his fiduciary position, the equitable rule is that the agent is to be treated as having acquired the benefit on behalf of his principal; therefore, the benefit is beneficially owned by the principal (“the Rule”). The question before the Supreme Court was the extent to which the Rule applied in relation to secret commissions or bribes.

The Supreme Court analysed the case using three factors: (i) existing case law; (ii) legal principles; and (iii) principle and practicality.

Existing case law

The court found that previous cases, with the exception of Tyrrell v Bank of London, were consistently in favour of benefits being held on trust for the principal. This was the situation until the decision in Metropolitan Bank v Heiron, which was then followed by Lister & Co v Stubbs. These cases found that, whilst a principal was entitled to equitable compensation for the amount of the bribe or secret commission, he had no proprietary interest in the bribe or secret commission. Lord Neuberger admitted that “the courts took a wrong turn in Heiron and Lister”[1] and that the court should also disapprove the decision in Tyrrell. The court decided that all subsequent cases to Lister are explicable on the the basis that the decision in Lister was binding. Lord Neuberger made it clear that previous authorities “do not represent a clear and consistent line of authority”[2], which made it possible for the court to accept FHR’s arguments.

Legal principles

FHR contended that the Rule should apply as an agent ought to account in specie for any benefit obtained in any situation in which he was in breach of his fiduciary duty; the agent arguably holds such benefit on trust for his principal. It was also argued that equity does not allow an agent to rely on his own wrong to justify retaining a benefit.  By contrast Cedar interpreted the Rule such that, as it was a proprietary remedy, it should not apply to benefits which were not derived from assets or property of the principal, as it was never intended for the principal to receive such assets or property. In addition, the Rule should not apply to benefits which could not have been intended for the principal and were, rightly or wrongly, the property of the agent. Legal commentary was divided on these points.

Lord Neuberger acknowledged that previous legal authority surrounding this area meant that “it is not possible to identify any plainly right or plainly wrong answer to the issue of the extent of the Rule, as a matter of pure legal authority….it is fair to say that the concept of equitable proprietary rights is in some respects somewhat paradoxical.”[3] Therefore, it was appropriate to consider arguments based on principle and practicality.

Principle and practicality

Lord Neuberger favoured FHR’s argument as it had “the merit of simplicity”[4] whereby any benefit acquired by an agent, because of his agency and in breach of his fiduciary duty, is held on trust for the principal. The court stated that “clarity and simplicity are highly desirable qualities in the law….and, accordingly, in the absence of any other good reason, it would seem right to opt for the simple answer.”[5] FHR’s argument also aligned the situations in which an agent must account for any benefit and those in which the principal can claim ownership of the benefit; to do otherwise would mean allowing for inconsistency.  If the Rule were to not apply to bribes or secret commissions, a principal whose agent received a bribe or secret commission would be worse off than one whose agent received a benefit in less dishonest circumstances.

The Supreme Court rejected Cedar’s argument that a principal could not have a proprietary right to a secret commission or bribe because the principal would never have been entitled to such monies, on the basis that the bribe or commission would probably have reduced the benefit received by the principal and so should form part of his property.

The court also considered the wider policy considerations indicating that bribes and secret commissions should be the property of the principal as they “undermine trust in the commercial world”,[6] and one would expect the law to be particularly stringent in relation to these.  There was also no sympathy for the argument that providing a proprietary remedy would be prejudicial to the agent’s unsecured creditors, as the agent’s estate would be reduced. The court stated that any proceeds from a bribe or secret commission should not have been considered a part of the agent’s estate in the first place, and it would be just for a principal to be able to trace the proceeds into other assets or into the possession of knowing recipients.

Comment

This judgment represents a watershed moment in law in relation to proprietary remedies and offers sensible clarification to previously criticised decisions. The rule is not confined to agents and principals, but to all fiduciary relationships (including employee/employer). It also provides victims with a two pronged attack (proprietary and personal remedies) against an agent in respect of benefits wrongfully received.

[1] Paragraph 49

[2] Paragraph 46

[3] Paragraph 32

[4] Paragraph 35

[5] Paragraph 35

[6] Paragraph 42